The Four Dimensions of Customer Value

Most companies assume customer value is directly measured by the amount of revenue generated by a customer. While a company’s accounting department should think in terms of revenue, profit, and loss, the intrinsic worth of a customer is multidimensional, and should be viewed as such. Depending on your business model, your financial state, and the maturity of your company, choosing the right dimension on which to measure customer value can mean the difference between success and failure.
So what are the dimensions? We define customer value in four parts: revenue, loyalty, sentiment, and engagement. Read below to understand how each dimension affects your company’s sales strategy.

Revenue

The more money a customer spends, the higher the revenue for your company. Though not tied to profit, there should a correlation between the two. This is the most direct measure of value, as it ties every customer to clear, measurable financial metrics that have already been observed.

Loyalty

Loyalty is a measure of likelihood of future revenue. Would you choose a customer that spends $1,000 today and never again, or one that spends $100 today and likely will return every month for the coming years? Generally speaking, loyal customers are preferred as they tend to spend more in the long run. They are the ones who return to your brand, spending money regularly and providing much-needed cash infusions into your business. In this case, long-term benefits win at the cost of short-term revenue.

Sentiment

Another estimate of future revenue is sentiment: happy customers tend to be loyal, and likely will spend money in the future. Happy customers tell their friends, colleagues, and acquaintances about your company, which also drives increases in expected future revenue. Note that such customers need not be loyal or drive revenue: a customer who tells their friends about you might drive several referrals, regardless of whether they purchased your products or services.

Engagement

Engagement is your final customer lifeline — an indicator of whether a potential customer even thinks about you when considering their options. Take the worst case scenario: you have a potential customer (no revenue, no loyalty) who is unhappy. The saving grace for your company is if this individual is, at the very least, engaged with your company or brand. If they reach out to you for technical support, Tweet about you, or call your sales team for help, you have an engaged lead that can be converted into a sale. In this way, engagement is a last hope for companies struggling to find revenue generating opportunities.

All Four, Together

Together, these four dimensions provide a framework you can use to categorize every lead and every customer. In the worst case scenario, you have an individual that is not loyal, not engaged, has not spent money, and is unhappy. The best — and opposite — scenario is a happy, loyal customer, engaged with your brand and spending money regularly.

The power of this framework is two-fold: it allows you to rank customers based on different dimensions, and also provides different solutions for increasing the value of your customers depending on the dimensions they underperform. For example, an unhappy-yet-loyal customer should be a priority for any sales team: this is someone who has consistently supported the company, but whose experience is now lacking. Such customers likely need personalized support but have shown an affinity for the products in the past, so discounting or upselling them is likely a bad idea. Alternatively, an engaged-yet-unvaluable customer is a further opportunity for investing in a longer-term relationship. This is someone who has not made many (if any) purchases, and thus should be enticed with discounts or product bundles.

Using this four-dimensional framework helps prioritize customers and clarifies opportunities; simply treating customer value as a metric based on profit or revenue is short-sighted and incomplete.

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Wojciech Gryc is the CEO of Canopy Labs. Prior to Canopy Labs, Wojciech was a consultant with McKinsey & Co. and a researcher at IBM Research. Wojciech is a Rhodes Scholar and Loran Scholar.

4 Comments

Lee on November 19, 2012 at 3:25 pm

Interesting article and framework for understanding customers.

I often hear too much focus on “retention” and ensuring that customers maintain their business with a particular company or brand. It seems that a big mistake that businesses make is assuming that loyal customers are happy or engaged when rather, some people have no other options or simply pay for the sake of convenience. I think the point about understanding and almost humanizing the customer through these dimensions is critical for taking a more people centric approach to business.

Thanks Lee. You’re absolutely right… In many ways different industries would use the value dimensions differently. For example, “engagement” might be too expensive in some cases. Similarly, if your prices are great and you’re a necessity (e.g., a telco in some countries), you might not prioritize on sentiment at all.